How to Invoice with the new VAT system in Ghana [template provided]

Well, the new Value Added Tax (VAT) was brought into force last year but we still receive invoices from vendors of clients who used the old VAT rate. The old VAT system is at a rate of 17.5% which is made up of 12.5% for VAT revenue for Ghana Revenue Authority (GRA), and 5% paid into (National Health Insurance Levy) NHIL & (Ghana Education Fund) GETFUND. This 17.5% is applied wholly on the tax exclusive amount to arrive at the VAT to be charged. Moreover, all these taxes paid are recoverable, meaning you can defray part of the taxes with your input VAT received from your vendors.

However, in the new system, there is a separate levy of 2.5% for GETFUND, another 2.5% for NHIL. These two levies are supposed to be initially calculated on the VAT exclusive amount to arrive at the first set of taxes to add to the VAT exclusive amount. After adding these two levies to arrive at a new sub-total, calculate the VAT of 12.5% on that sub-total to arrive at your total VAT to be charged to your customer. What this means is that, currently, the 12.5% VAT is a compound tax; it requires that all preceding levies/taxes to be added to the selling price before applying the tax percentage. Moreover in the new system, GETFUND and NHIL are not recoverable, meaning they cannot be reduce with input VAT.

Example – New VAT system

With this new system, you will have to file the GETFUND and NHIL together on one returns forma and the VAT on a separate returns form. Also, the GETFUND & NHIL are not recoverable, so you cannot reduce them by your input VAT. However, you have the option of treating them as expenses in your income statements to reduce your chargeable income. Moreover, you will realize the the new VAT, being a compound tax, allows for the addition of the GETFUND & NHIL amounts before the 12.5% is applied.

Now, finally some clients have asked us how they can get to their final sales (VAT inclusive) using a single percentage without going through all these calculations. The answer is to use an effective rate of 18.125%. By using 18.125%, you can arrive at an amount which includes the two levies (GETFUND & NHIL) as well as the VAT.

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Edward is a co-founder and the CEO of Built Accounting. He's a chartered accountant and his professional interest is in accounting technology implementation, financial management, corporate reporting and strategy.

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3 Comments

On using the effective rate, I guess that’s solely for decision making and guessing the estimated cost of a transaction cause GRA explicitly requires you to show the various components on your VAT receipts (in the order of GETFund, NHIL Levy and the VAT.

I would be glad if in your subsequent article, you would take a look at Withholding Tax on VAT.